Chips Act aims to make Europe a semiconductor powerhouse

Semiconductors are vital components of many consumer electronic devices and devices relied on by businesses increasingly powered by and dependent on digital technologies. However, there is a current global shortage of the components, which has been exacerbated by the pandemic. The shortage is predicted to last through 2022 and potentially beyond.

Recognising the impact of the shortage on sectors such as automotive and health, the European Commission has proposed actions that it said can be taken immediately to address the current shortages. In tandem, it has proposed new legislation – a new Chips Act – to provide for security of supply in the longer term.

The immediate crisis response, the Commission said, should be led by a European semiconductor expert group containing representatives from EU member states. It is envisaged that the group would gather information from trade bodies or individual companies involved in the semiconductors market about the state of supply and that EU countries ask manufacturers to “prioritise the production of crisis-relevant products to ensure critical sectors continue to operate”, if appropriate.

Another possible action that could be taken immediately includes giving the Commission a mandate to act as a central purchasing body for public procurement of crisis-relevant products for certain critical sectors, while conditions on the export of crisis-relevant products could also be imposed, it said.

The draft Chips Act published by the Commission is aimed at bolstering European capacity to make semiconductors in the years ahead. The Commission’s ambition is for 20% of the worldwide production of semiconductors to stem from Europe by 2030.

If implemented, the draft Chips Act would provide a framework through which public funds could be channelled towards innovative new semiconductor manufacturing facilities, in line with EU state aid rules. It is further envisaged that the facilities would benefit from fast-track processes to enable them to clear administrative hurdles, such as in relation to planning and construction, as quickly as the law allows.

Also detailed in the draft Chips Act is a widespread initiative aimed at supporting “large-scale technological capacity building and innovation” in relation to semiconductors.

The European Commission, which has published the proposals, plans to commit €3.3 billion of EU funds to the initiative, with objectives listed including the creation of semiconductor hubs across the EU, the piloting of new semiconductor technologies, improving design and engineering capabilities, and helping companies in the semiconductor value chain gain access to debt financing and equity. A new European Chips Infrastructure Consortium is to be created to lead on the activities under the initiative.

Florian von Baum, Munich-based expert in technology, science and industry who specialises in semiconductor issues at Pinsent Masons, said: “Building one chip manufacturing factory may require an investment of €20 billion or so, so it is a high capital expenditure. The real impact of the new EU program is therefore in question.”

Provision is also made in the draft Chips Act for many of the market monitoring and crisis response plans the Commission has outlined for immediate action to be enhanced and given a statutory footing.

The plans envisage businesses in the semiconductor value chain sharing information “regarding significant fluctuations in demand and known disruptions of their supply chain” with national authorities, and those authorities notifying the Commission of a potential emerging crisis via a new early warning system.

A crisis situation would be deemed to have arisen “when there are serious disruptions in the supply of semiconductors leading to significant shortages”. In that event, the Commission would have the power to instruct designated manufacturing facilities that received public funds to “accept and prioritise an order of crisis-relevant products”.

Von Baum said: “A more coordinated approach could help. However, the EU coordinated procurement process for Covid-19 vaccines supply – which serves as a blueprint for this approach – was not without its challenges. Chip supply has a very high complexity level with a high division of labour and an internationally fragmented value chain. The extent to which governments and regulatory bodies should have the power to intervene in this complex eco system will be the subject of significant debate.”

European Commission president, Ursula von der Leyen, said: “The European Chips Act will be a game changer for the global competitiveness of Europe's single market. In the short term, it will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions. And in the mid-term, it will help make Europe an industrial leader in this strategic branch. With the European Chips Act, we are putting out the investments and the strategy. But the key to our success lies in Europe's innovators, our world-class researchers, in the people who have made our continent prosper through the decades.”

Von Baum said: “The new law must be seen in the context of the recent US ‘Chips for America Act’ and plans of the Chinese government for massive support of the Chinese semiconductor industry.”